Global Minimum Tax is Inexorable

The EU achieves unanimity with Global Minimum Tax (GMT)

On 15 December 2022, the European Council completed the “written procedures” for a European Union (EU) Directive to introduce the GMT regime under the Organisation for Economic Co-operation and Development’s (OECD) Pillar Two. All 27 countries will proceed to transpose the directive into national law by the end of 2023 for implementation in 2024. Apart from the EU, major economies such as Japan, Korea, Hong Kong, Switzerland, and the United Kingdom would follow suit. With this, the rest of the world is more likely to expedite their plans for adoption. The rationale is simple – if you choose not to do it, your taxing right will be ceded to the nations that has adopted it.

Where is Malaysia on GMT?

GMT does not depend on the government of the day. To recap, GMT and Qualified Domestic Minimum Top-Up Tax (QDMTT) were mentioned in the Budget 2023 Speech on 7 October 2022, both of which are expected to be implemented in 2024. Despite GMT’s complexity, Malaysia’s commitment to implement GMT is clear, and the recent move by the EU further cements the fact that GMT is inexorable.

What exactly is GMT and who will be affected?

In a nutshell, GMT at 15% is the new “low” for effective corporate tax rate for large multinational corporations (MNCs). An MNC can operate in low-tax, high-tax, zero-tax country or in a country that offers tax incentives. The universal GMT rules kick in to ensure the 15% tax is paid somewhere in the world. MNCs operating in at least two jurisdictions, with an annual consolidated group revenue of at least €750 million in at least two of the four immediately preceding fiscal years would be in-scope. Hence, certain large groups, especially Malaysian listed groups, the pension fund, government entities, and inbound investments of large foreign-based MNCs would be affected. Any top-up tax to 15% will be collected under QDMTT, followed by the Income Inclusion Rule (IIR) and finally the Undertaxed Profits Rule (UTPR), all of which operate on highly complex mechanisms.

Is it too soon to act?

Affected taxpayers should undertake impact assessment and evaluate its data readiness in early 2023. They should not be distracted by the fact that Malaysia has not yet legislated the rules. After all, the GMT rules are supposed to be in line with the OECD’s position and no major deviation is expected. While the first GMT return will only be due much later, time is of the essence given that impact assessment may take time, especially for the larger groups. It is key to identify entities within the group that present a higher risk as it may trigger a top-up tax. Even without top-up tax, massive compliance obligations need to be met. Upon impact assessment, diagnosis on data readiness and the need for additional resources would be critical. The impact on the existing tax incentive and new applications must also be duly considered.

From the financial reporting standpoint, one of the most prevalent questions is how GMT top-up taxes should be accounted for in financial statements. Last month, the International Accounting Standards Board (IASB) discussed this and will undertake urgent narrow-scope standard-setting. In January 2023, it plans to issue the Exposure Draft for the proposed amendments, which would provide a temporary exception from deferred tax accounting for top-up tax and require companies to provide new disclosures to compensate for the potential loss of information resulting from the temporary exception.

In light of the proposed changes to IAS 12, combined with the increasing importance of the ESG agenda, the reporting requirements of GMT need to be addressed as the calculations involve complex rules and extensive data requirements. There is also an urgent need to assess the implications of GMT on the group’s cash flows, dividend payout, tax position, etc. GMT is coming, and early preparation is essential.

The views and opinions expressed in this article are those of Tan Hooi Beng, International Tax Leader of Deloitte Southeast Asia and Kelvin Yee, International Tax Director of Deloitte Malaysia.

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